Boeing Extends Lead On Airbus

Each year, Boeing and Airbus engage in a fierce order battle. In 2017, Airbus won that battle by numbers, but in terms of dollar value, which AeroAnalysis ultimately considers to be more important, Boeing easily outperformed Airbus.

For 2018, Boeing expects order inflow to be moderated. That’s a pretty vague term, but it does not make it less interesting to look at orders and deliveries on a monthly basis to assess the overall appeal of aircraft on the commercial market. By looking at the orders, we can see a combination of willingness to commit with pricing, product, and availability coming together. Special attention will be paid to the mix of single-aisle aircraft and wide-body aircraft, knowing that a single-aisle aircraft costs roughly half or a third of a wide-body aircraft, depending on the model.

In this report, AeroAnalysis will have a look at the order inflow and deliveries for Boeing in August 2018. If you missed the July edition, you can read it here. The article is paywalled, but is freely available to subscribers and trial members of the AeroAnalysis Marketplace service.

Orders in August

Figure 1: Orders Boeing August 2018

During the month of August, Boeing received a total of 99 orders valued at nearly $6 billion after discounts:

Farnborough International Airshow order – Air Lease Corporation (NYSE:AL) firmed up an order for 3 Boeing 787-9 aircraft and 30 Boeing 737 MAX aircraft.

Farnborough International Airshow order – Aviation Capital Group finalized an order for 20 Boeing 737 MAX aircraft.

The order from Air Lease Corporation was first announced at the Farnborough International Airshow – 3 Boeing 787-9, 20 Boeing 737 MAX aircraft and 55 options for the Boeing 737 MAX. So, it seems that part of the options have already been converted into firm orders, leaving 45 options to be exercised.

During the month, we saw that the cancellations increased by 5 units. What we found is that the order that Hawaiian Airlines (NASDAQ:HA) placed in July for 10 Boeing 787-9 aircraft was reduced by 5 units, while Boeing Capital Corporation ordered 5 aircraft. It can be expected that these aircraft will be leased to Hawaiian Airlines.

August was a strong month where Boeing booked 99 gross orders versus the three- and five-year average of 36 and 46 units. In the first 8 months, it booked 581 net orders versus 426 net orders last year. So, Boeing is having a strong year, and it will be interesting to see whether the company can keep that positive momentum all the way to year end.

From the Farnborough International Airshow orders, roughly half have now ended up in the order book, which is still somewhat disappointing, as it seems that the term “firm” is more widely interpreted than in the past, leaving some doubts about when or whether we might see some of the tentative agreements being finalized.

Deliveries in August

Figure 2: Deliveries Boeing August 2018

For 2018, Boeing has set a delivery target of 810-815 units, which has been reaffirmed in September. In December 2017, AeroAnalysis set a 2018 delivery target of 816 units at the low end. Boeing is more or less meeting our expectations here.

In August, the company delivered 64 aircraft, up 39 units from a month earlier:

It delivered 48 Boeing 737 aircraft, including 23 of the MAX variant.

Boeing 787 deliveries were 4 units below the production rate of 12 aircraft per month.

After a month of no deliveries, the company delivered 6 Boeing 777 aircraft, including 2 freighters.

What we are seeing is that with the exception of the Boeing 787 and Boeing 737, programs are more or less running as expected. On the Boeing 787 program, there seem to be some supplier issues mostly regarding the availability of seats as well as customer-specific issues regarding financing, as explained by Uresh Sheth. Those rumors seem to be more than just that, as it is known that the HNA Group has some aircraft sitting around awaiting delivery, and previously, Airbus refused to deliver aircraft to the group as it was late on payments.

On the Boeing 737 program, we saw some recovery in the delivery profile but things remain challenging. Boeing has a recovery plan in place that should drastically reduce “traveled work” by the end of October, but we continue to expect that a full recovery is going to take until the end of the month, and reaching this year’s delivery target remains unchanged challenging. We’ve been asked to provide monthly updates on the challenges, including updates to our 2019 estimates. For the time being, we’re not planning on analyzing the challenges in separate pieces on a regular basis beyond the coverage we already provided in August and September. Small updates will be added in the monthly news items as well as the order and delivery reports.

Since Boeing showed an uptick in deliveries month over month, it has been suggested that the low delivery volumes in July are reflecting seasonality. We don’t think that is the case, since last year the company delivered 58 aircraft in July compared to 39 this year. With 64 deliveries in August compared to 66 in the same month last year, Boeing is getting back on track, but the increased production is not yet reflected in the delivery figures.

Year-over-year deliveries increased by 5 units, while the delivery target increased by 50 units. This reconfirms that despite recovery in the delivery profile, Boeing is not there yet, and it needs to hit the rate of 55 single-aisle deliveries on top of shortfall in earlier months to reach its delivery target.

Book-to-bill ratio

For 2018, the company remained somewhat vague on the subject of the book-to-bill ratio, expecting “moderated” order inflow.

Obviously, shareholders are hoping to see Boeing having a book-to-bill ratio of 1 or higher for the full year. AeroAnalysis currently is expecting it to be between 1 and 1.25.

In August, Boeing booked 99 gross orders while delivering 64 aircraft, indicating a 1.55 book-to-bill ratio driven by low order inflow and low sales. In terms of value, this ratio was 1.28, reflecting single-aisle domination in the order mix. For the first 8 months of 2018, the gross book-to-bill is 1.53 and 1.53 in terms of value. Thus, the company is having a good year so far, but what the book-to-bill ratio does not capture are the supply chain challenges. It’s good to continue capturing orders, but it is a smooth and efficient output that matters.

Conclusion

In August, we saw some orders from the Farnborough International Airshow being finalized. Normally, we see a majority of the orders announced during the airshow being added in the same month, but that is something we did not see happening this year. We often see investors using the airshow order announcements to justify higher share prices. I think we see now quite clearly why an order announcement should not justify higher share prices: an order announcement, even when firm, does not get added in the book until all contingencies are fully cleared. So, a firm order announcement does not equal a logged sale in the same month, and definitely does not add to the financials to the same extent as a delivery. With backlogs stretching years, the positive impact on earnings is not felt until years later. Nevertheless, I think it is nice that jet makers choose airshows as stages to announce their orders and give a peek into their pipelines, but it should go with more clarity in the press releases.

On the delivery side, we saw an uptick in single-aisle deliveries. We have seen some euphoria regarding the uptick in deliveries during the month, but that euphoria is not something we share. The recovering delivery profile is something that Boeing needs in order to hit its full-year targets, and a single uptick does not mean that the company’s problems are over. Boeing likely is facing the most challenging second half of the year.

Overall, we do expect that the company will be able to meet its delivery target, though there likely will be pressure on the delivery schedules of the Boeing 737 and Boeing 787. Looking at orders, Boeing has a good momentum as it captured some key customers for its aircraft, but the pool is finite, meaning it is going to depend more and more on repeat orders going forward.